Ask HN: Is there VC appetite for defense related startups?
We are in advanced talks (hence the throw away) with M&A teams of various of the top defense contractors for our startup, but me as CTO can't help but wonder if a VC model for us going forward wouldn't also be a good fit. Traditionally VC's shied away from hardware and defense startups but with the funding round of Anduril perhaps this is changing.
Katherine Boyle of A16Z also had something to say about how VC investment and Defense in the past didn't make sense, but that things could be changing [1].
The second problem with VC's is it is notoriously difficult to get in contact with the correct person, thus the proposal below. Dang let me know if this is not allowed please.
If there are any VC's perhaps interested you can contact me here
throwawaydefence at gmail dot com
and I can send you our prospectus / NDA agreement.
[1] - https://www.defensenews.com/smr/cultural-clash/2020/01/30/the-math-doesnt-make-sense-why-venture-capital-firms-are-wary-of-defense-focused-investments/
Edit - To address some of the comments below, this is a well established team (~50), with a proven track record, many years in the industry and a well developed sales pipeline, relationships and technology base.
So not just an idea or proposal thing, startup was maybe the wrong characterization but since this is HN...
The deal is (I believe) well above the typical SBIR grants threshold.
51 comments
[ 3.1 ms ] story [ 114 ms ] threadI'd say it's two incompatible business models: VCs are high variance and SBIRs (and other government contract vehicles) are low variance but will sustain you for a long time (once you get in).
Have you reached out to anyone at In-Q-Tel (https://www.iqt.org/) yet? Looked at AFWORX and SOFWORX? SBIR grants and projects (https://www.sbir.gov/).
I see a wide variety of things coming across AFWORX and SOFWORX indicating interesting in AI-style things, and also what I would consider more mainstream stuff like battlefield coms and situational awareness gear.
Feel free to contact me if you want to chat about anything in more detail.
Also, maybe it'd be more common in this industry, but asking for an NDA at the idea stage is a big red flag in VC (i.e. "ideas are worthless"). This might not apply to you, just a heads up.
Defense buyers aren't inherently irrelevant, though. I'm working on a defense-related project at a VC-backed company, and plenty of our peers are. We're selling a standard SaaS model, and that continues to support our business model.
The real challenge is that most tech companies scale up before going after defense, so they can absorb the costs. If you're small, you're going to have to figure out how to scale quickly in the defense world. If you can crack that, I'm sure you'd find a VC or two.
1. There are almost as many sellers as there are buyers (if not more sellers than buyers).
2. Virtually all revenue comes from contract-based programs.
3. The IT+personel security needs are so high that you can only outsource substantial work to other players in the same industry, or firms that specialize in working with the industry, so cutting costs by outsourcing doesn't work as well as it does elsewhere.
That very small pool of buyers can kick the can down the road whenever they want, so a huge chunk of money has to go into simply predicting when your company's next payday will happen. When your forecasts are wrong, you have to spend a bunch of time laying off employees who no longer have anything to do. Or it goes the other way, and you have to frantically recruit the best engineers you can find, and shuffle them all through a rigorous (read: expensive) background check process. Oh, and on the topic of background checks- don't forget that you have insane security needs, even by tech industry standards.
All of this makes for an environment that just isn't VC-friendly. Overhead is high, revenue is unpredictable, and the industry is designed that way. No amount of genius management/engineering can change that.
However, that's not to say all sales people avoid them. There are specialists just like VCs that do know their way around GEM. It's just going to be a smaller, more niche community.
Sounds like classic Silicon Valley thinking. The defense market isn't made up of rational actors perfectly evaluating every possibility. It's made up of humans with a huge budget buying things which they really don't want to fail. That means one thing: Inertia.
You don't make the money on the initial contract. That's just your foot in the door. You make the money on the 10 years of consulting work and follow-up projects and maintenance and adjustments and updates that come your way because hey we used these guys last time and they seemed alright.
https://techcrunch.com/2021/06/17/anduril-funding-series-d-v...
450 million at a valuation of close to 5 billion.
They have a fascinating list of investments - https://www.iqt.org/portfolio
Example: Red Balloon Security.
Of course, some successful VCs like Michael Janke are ex-military, and naturally he is in defence.
I don't personally know any US federal agents (that I'm aware of), so can't comment on the accuracy of that.
Fuck No!
The Federal acquisition process is an absolute nightmare that favors incumbents. Innovation in this sector is extremely difficult, because contracts are super specific, down to requesting/stating the exact technologies to be implemented, rather than a higher-level capabilities based RFP.
https://www.acq.osd.mil/DPAP/dars/dfarspgi/current/index.htm...
It's a nightmare, it's a quagmire, and it needs to be fixed. Until then, anyone who invests in a start-up in this space is out of their minds.
The only room for innovation is ambiguity in some legalese.
proactivity is either immediately repudiated or heralded as the new status quo.
In any case, I recently left the defense industry after a 20-year career and am working in the private sector (financial-sector stuff using Clojure) now. It's a completely different world. Tech that was just being introduced in the govt space is old hat out here in the real world -- and my last defense job was working in the R&D space on ML/AI projects where we were allowed to experiment with "cutting edge" (i.e., only 5 years behind state of the art, rather than the usual 10-20) tech.
I had a brief stint as a SETA contractor several years ago, during which I learned what a clownshow the acquisition process is. I was supposed to be providing technical expertise and evaluating proposals - but really I was there to justify decisions that had already been made, and to be the "technical guy" that decision makers brought along to meetings to support them :)
I think this has implications for the particular question being asked here in terms of growth opportunities, but I also think it's a big reason why the defence industry is stagnant and has to copy innovation from the consumer sector. If companies were coming up with products (all the way up to warplanes), and then selling them to customers I think there would be much greater advancement, and probably much better product focus on what the product is trying to achieve!
There are obviously business model challenges to this - you're talking about a product with potentially 1-2 customers in some cases, and therefore a lot of risk. But it's interesting that the Israeli defence sector has moved a little more in that direction.
Reach out to Josh Wolfe from lux capital, or Delian from Founders fund.
Highly recommend:
- Founders Fund
- Lux Capital
I'd be interested in the later stage VC case for investing in a defense startup whose main out is to be acquired by a behemoth that has all the regulatory, support, cleared staff, and certification facilities to get on the necessary procurement vehicles to realize revenue.
Speculatively, without defense contract revenue, the acquisition math seems like acquihire numbers and some IP, which is in the low mid eight figures range, so it implies a ceiling on the best case for a $5m-$10m VC investment unless you have the most valuable patents on the planet. That said, a "breadth first" fund (my word) that puts small amounts in at early stages may want the exposure and participation for other strategic reasons, such as the ventures arm of some defense contractors having a mandate to bring startups in with them on their large bids, or a fund with other portfolio companies who would also benefit from the defense oriented tech and access to your channel.
My experience is (n=1) limited and speculative, but I've also worked for security and cryptography companies where the procurement vehicle thing was an issue, and have to think this through a while ago, and that's what I can add. Please don't let me mislead you, etc.
Palantir (who is end to end) has opened up VC appetites for defense and you see a certain signaling pattern to the VC backed defense start ups vs the traditional small defense business upstart.
I work at a "start up" that develops a component so we took a strategic investment from a defense contractor and that has enabled us to develop core technology and grow commercially while being patient with the arduous cycles of programs.